Sometimes in the rush to meet Rule 23(a) and (b)’s requirements, what gets overlooked is whether there is any underlying claim in the first place. In a refreshing opinion, the Southern District of New York disposed of a claimed ERISA class action for the reason that, irrespective of any class allegations, the defendant was not alleged to have done anything illegal. In Skin Pathology Associates, Inc. v. Morgan Stanley & Co., Case No. 1:13-cv-03299-AT (S.D.N.Y. Feb. 24, 2014), the plaintiff established a 401(k) plan for its employees, and retained Morgan Stanley to provide the program in which the 401(k) funds were to be invested. Morgan Stanley, in turn, hired ING to perform investment and recordkeeping services. So far, nothing controversial.
Where the issue arose, however, was that ING and others were to pay Morgan Stanley a fee, termed a “kickback” by the court, based on the amount of money actually invested in the 401(k) accounts. Importantly, this fee was not paid from the plan assets, but, rather, by ING itself. Just as importantly (at least from a practical standpoint), the existence of the fee was disclosed in the financial disclosure statements the plaintiffs signed when they retained Morgan Stanley as investment manager. The plaintiffs brought a putative class action asserting that these arrangements were prohibited transactions under ERISA.
As to the merits, the court had first to parse through ERISA and the complaint to determine the nature of the claimed violation. It addressed difficulties arising from the statutory language and the fact that the kickbacks were not being paid from plan funds. It ultimately concluded, perhaps a little reluctantly, that the arrangement would have been illegal only if it had not been disclosed. The court found, however, that the plaintiffs were challenging the arrangement itself, not a failure to disclose it, and that in any case it appeared that it had been disclosed. Thus, the court dismissed the complaint without leave to amend.
The Skin Pathology case is important because it reflects a court addressing the merits early on rather than awaiting lengthy and expensive discovery before making a ruling. As it followed from the court’s analysis, no class, however constituted, would have had a claim. One can only imagine the discovery costs alone had the parties been required to undertake class-wide discovery on likely thousands of 401(k) plans had the court awaited discovery to dispose of the claims.
The Bottom Line: Some class actions are best dealt with at the pleading stage rather than after extensive discovery.